How States Identify

Tax Dodgers

Misconceptions & Falsehoods –

Regarding Why Your Business Will Not be Audited

Business owners who knowingly conduct business in another state and fail to register to do business in that state are assuming a significant tax liability risk. The same holds true for owners who fail to understand the tax nexus rules and are inadvertently liable for taxes to another state. Nexus is the contact that a business has with a state that is sufficient for that state to tax the business. Unfortunately from a compliance perspective, the nexus standard differs by state and also differs by type of tax (sales, income, franchise, gross receipts, etc.). If you have not already read our July 24, 2018 blog about how the U.S. Supreme Court changed how nexus is determined, you need to read that landmark case (S. Dakota v. Wayfair).

States are always looking for new sources of tax revenues to provide services to their constituents. In-state businesses are prone to complain if legislators raise their taxes. Accordingly, states especially like out-of-state businesses because they do not have a say in state elections. Since sales tax usually comprises a very significant, if not the major component of state tax revenues, states often focus on sales tax nexus.

Some business owners when a nexus study is proposed to them tend to ignore such advice, relying upon various misconceptions and instead choose to play the audit lottery game.

Misconception #1: Our business is too small for a state to audit

It is true that large companies have a higher likelihood of being audited than a small business (states follow the money). However, if your small business is selling (providing) taxable products or services to a large company in another state, the state auditor is looking for audit leads while examining the large company. If the auditor finds that the small business is not charging sales tax, then the vendor could be placed on an audit list if there is any evidence of nexus.

For PA business owners, we suggest you read our January 27, 2015 blog about PA joining the Multistate Tax Commission to better understand how states share information among themselves.

Misconception #2: Your competitor is your friend

If a competitor gets audited and claims that “I know that my competitors do not charge sales tax and that puts me at a competitive disadvantage”; the auditor is likely to make a list of those competitors and submit them for audit examinations.

Misconception #3: No Bounty Hunter will audit my company

There are firms hired by states that receive a percentage commission for assessing taxes against taxpayers that the states are not auditing. These firms are often referred to as bounty hunter companies. They often receive a percentage of the assessment they make against your company (and not of the final tax due after appeals). Thus, it is easy to understand why these bounty companies are prone to be very aggressive in their assessments. Your company is then placed in a defensive position of proving what you really owe.

Misconception #4: Disgruntled employees are of no concern

A disgruntled employee may contact a state’s whistleblower program to claim a bounty for identifying a company not paying its fair share of taxes. Some states pay the whistleblower between 15 percent and 30 percent for information it shares about a tax dodger. That can be quite a financial incentive for a former employee to contact a taxing jurisdiction to share what it knows about your business operations.

Misconception #5: If another state finds that my business owes taxes due to nexus, I’ll simply file an amended return in my home state and offset the taxes due.

If a state finds that a business has nexus in its state, and no tax returns have been filed, there is no statute of limitations (SOL) and thus the state can assess back taxes, interest and penalties from the date that nexus is determined by the state. Thus the tax assessment could be for a multitude of tax years. You may find that in your home state the only years that can be amended are the three most tax years as the earlier years could be closed by the SOL. That means that you are paying tax twice on those taxable sales identified by the auditor. If you are thinking that double-taxation is not fair and wish to challenge that in the state where nexus was found, you need to consult with your legal counsel. Some states have ruled that if a business has failed to register to do business in its state, it has no legal standing it that state.

Here is the good news.

Business owners can engage an experienced tax professional to conduct a nexus study. The benefits of such a study include (1) identifying states for which the business has nexus and tax returns are not being filed; (2) identifying the tax liability exposure in terms of dollars owed to the state(s) where nexus is found; (3) understanding the nexus connection and where possible how to sever that nexus by changing how business is conducted in that state; (4) if nexus is found, identify any amnesty programs that the business can utilize to minimize the past due tax assessment.

If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.

Copyright © 2018 Keystone Financial Solutions, Inc. All rights reserved. BE SURE TO READ THE DISCLAIMER PAGE: Content in this blog is for educational purposes only and should not be considered as the rendering of tax, legal or investment advice. The publisher of this blog makes no representations as to the accuracy or completeness of any information herein, will not be liable for any errors or omissions, and shall not assume liability for any losses, injuries, or damages from the display or use of this information.

About F. Bryan Haarlander, EA, CTRS:

Bryan Haarlander is an IRS licensed Enrolled Agent and who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

How Small Business Owners

Go Out of Business

Three Pitfalls to Avoid

For over 17 years, our firm has been working with entrepreneurs who start their own business. During the initial meeting with the entrepreneur and discussing his/her plans, or meeting with a struggling business owner, we can often predict with reasonable certainty as to which businesses will succeed and which will fail due to the years of experience of working with such persons.

Our determination of ownership success is often centered on the following three items:

Cash Resources:

Cash is king, and knowing a business’s cash flows is a MUST if a business is going to be successful. New business owners need to incorporate a cash flow analysis in their business plan. We suggest that a five-year cash flow projection be done. While many entrepreneurs will do an annual cash flow, we recommend (at a minimum) that a monthly cash flow be done for the first two years as those are critical years.

A good cash flow needs to be prepared on a conservative basis. That means you need to implement worst case scenarios into your cash flow projections. In other words, when looking at the range of income and expenses the business may experience, use the lower projected revenues and the higher expense range. New businesses will experience unexpected expenses, so having a conservative cash flow projection will hopefully enable you to weather those unexpected expenses.

Keep in mind that when opening a new business, it can take weeks or months before you can open your doors due to finding a suitable location, contract delays, landlord negotiations, zoning laws, inspections, etc. Once you are open for business, customers need to find you. That can create a revenue delay of several weeks or months. And during these delays before your full monthly revenues are generated, you need to meet payroll, rent, loan payments, etc. In other words, positive cash flows usually take much longer than originally participated. Hope for the best, but plan for the worst.

A good business plan has a reserve of capital that can be drawn upon for those unexpected cash delays. This could be bank CDs, retirement funds, or family and friends who could lend money. If these capital reserves are non-existent, the business will be placed in a troublesome position.

When the entrepreneur’s business plan shows that a salary or a distribution is being paid to the business owner during the initial months of operations, it is a signal that the entrepreneur does not appreciate the cash flow challenges his (or her) new business will experience. The entrepreneur needs to have capital reserves to pay his personal living expenses while the business is starting.

Even established business owners need to periodically monitor their cash flows. Depending upon the type of business, inventory turnover ratio, receivables turnover ratio, sales revenues, etc., this periodic review could be daily, weekly, or monthly. [Read more…] about How Small Business Owners Go Out of Business

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